Maruwa Unyu Kikan 9090
丸和運輸機関
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Summary
Maruwa Unyu Kikan Co., Ltd. is a logistics company specializing in services for retailers. It provides comprehensive third-party logistics (3PL) in arrangements that promote the separation of logistics and commercial distribution.
Air Freight & Logistics
Key dates
2021-08-16
Coverage initiation
Executive summary
Business overview
Maruwa Unyu Kikan Co., Ltd. is a logistics company specializing in services for retailers. It provides comprehensive third-party logistics (3PL) in arrangements that promote the separation of logistics and commercial distribution. The company targets growing customers and markets. Major customers include Amazon Japan G.K. (subsidiary of Amazon [NASDAQ: AMZN]; 23.4% of revenue) and Matsumotokiyoshi Holdings Co., Ltd. (TSE1: 3088; 12.7% of revenue). The company formed a partnership with the latter in 1995, a time when drugstores were rapidly expanding. In 2013, it launched a cold-chain logistics business for supermarkets. The company became a last mile provider (handling the final stretch of deliveries) for Amazon Japan in 2017 to take advantage of the expansion in e-commerce.
The Logistics segment (99.1% of revenue in FY03/21) comprises three domains based on customer type: E-commerce and Room-Temperature, which handles room-temperature logistics (e.g., furniture and household products), as well as e-commerce logistics for Amazon Japan and other providers; Foods, which focuses on cold-chain logistics for supermarkets; and Medicine and Medical, which handles logistics for Matsumotokiyoshi Holdings and pharmaceutical wholesalers. In FY03/21, E-commerce and Room-Temperature accounted for 41.1% of revenue (Amazon Japan represents 23.4%), Foods for 40.0%, and Medicine and Medical for 18.1% (Matsumotokiyoshi Holdings represents 12.7%).
Major customers include Amazon Japan G.K., Ryohin Keikaku Co., Ltd. (TSE1: 7453), and Duskin Co., Ltd. (TSE1: 4665) in E-commerce and Room-Temperature; Lopia Co., Ltd. (unlisted supermarket), Yamazawa Co., Ltd., and Belc Co., Ltd. (TSE1: 9974) in Foods; and Matsumotokiyoshi Holdings, Alfresa Corporation (a subsidiary of pharmaceutical wholesaler Alfresa Holdings Corporation [TSE1: 2784]), and Paltac Corporation (TSE1: 8283; a pharmaceutical wholesaler) in Medicine and Medical.
The company typically enters into logistics contracts with customers for periods of around five years. Payments are based on a set percentage of the cost of goods sourced by the customer (or the cost of goods excluding logistics costs) that pass through the company’s logistics centers. Depending on the customer’s needs, the company either shoulders the entire logistics process (3PL) or handles only transportation and delivery (trucking only or last-mile delivery only). The ratio of the former (comprehensive 3PL) to the latter (transportation and delivery) in consolidated revenue is 7:3.
In the provision of 3PL, Maruwa Unyu Kikan first works with customers to select a site and design for a new logistics center, from which point it proposes systems for warehouse management, picking, packing, sorting, and pre-shipment inspection as well as transportation schedules and reverse logistics arrangements. When consulting with customers, the company is able to propose commercial distribution arrangements in addition to logistics arrangements. Maruwa Unyu Kikan believes that this creates an opportunity for retailers to improve their logistics part of the business. Its adroitness in this area is owed largely to the experience of its founder and current president, Mr. Wasami, who once managed a greengrocer business and has a track record of helping bankrupt supermarkets rebuild their businesses.
In FY03/21, the company’s cost of revenue ratio was 88.1% and SG&A ratio was 4.8%. Of costs of revenue, truck leasing costs were the largest item at 42.0% of revenue, followed by labor costs at 24.6%, subcontracting and outsourcing costs at 7.2%, and fuel and oil costs at 1.0%.
Maruwa Unyu Kikan’s long-term goal is to achieve revenue of JPY1.0tn by 2040. To this end, the company is currently building one of the largest food logistics centers in Japan to bolster its food logistics capabilities. It forecasts total investment of approximately JPY40.0bn, with completion scheduled for 2025. The company anticipates robust demand for new food logistics centers due to the following: its prospective large customers; growth in cold-chain logistics; strong demand for large, state-of-the-art centers to improve efficiency; and the fact that many supermarkets have yet to adopt 3PL. The company may also be able to use the new center to consolidate some of the logistics bases of the company’s existing customers.
Earnings trends
In FY03/22, revenue was JPY133.0bn (+18.6% YoY), operating profit was JPY8.6bn (+7.8% YoY), recurring profit was JPY9.1bn (+10.6% YoY), and net income attributable to owners of the parent was JPY6.1bn (+10.6% YoY). Of the JPY133.0bn in revenue, JPY132.0bn (+18.8% YoY) was generated in the Logistics segment and JPY976mn (+1.8% YoY) in the Other segment. The Logistics segment breakdown was JPY67.3bn (+46.1% YoY) from the E-commerce and Room-Temperature domain, JPY44.4bn (-0.8% YoY) from the Foods domain, and JPY20.3bn (+0.1% YoY) from the Medicine and Medical domain. Operating profit was JPY8.4bn (+8.0% YoY).
In FY03/23, the company forecasts revenue of JPY171.5bn (+28.9% YoY), operating profit of JPY11.1bn (+28.7% YoY), recurring profit of JPY11.5bn (+26.1% YoY), and net income attributable to owners of the parent of JPY7.4bn (+20.5% YoY). The company has formulated a new medium-term management plan covering the years from FY03/23 to FY03/25. Under the new plan, the company will focus on securing and training personnel to support business expansion and improving productivity through the promotion and application of digital transformation. These measures are in response to the increasing volume of goods in the core domains of e-commerce logistics, cold-chain logistics, and medicine and medical logistics, as well as the growing shortage of personnel and vehicles in operation. Further, the company will strive to maximize economic value by appropriately allocating management resources to concentrate investment in growth businesses and by revitalizing and restructuring low-profit businesses to improve management efficiency. It also plans to create social value by practicing ESG management.
On May 10, 2022, the company announced a medium-term management plan covering the three years from FY03/23–FY03/25. Its FY03/25 targets are JPY240.0bn in revenue (an increase of 80.5% from FY03/22), JPY17.1bn in operating profit (97.7%), and JPY17.5bn in recurring profit (91.5%).
Strengths and weaknesses
Shared Research sees the company’s strengths as:
The ability to combine logistics proposals with commercial proposals that boost profits for its customers
Thorough employee training that enhances teamwork and service provision at complex job sites
The company’s nationwide network of leased trucks and its systems for coordinating them
We see its weaknesses as:
The time it takes to pass cost increases on to customers
Difficulty in raising profit margins as the need to tailor services to individual customers and engage in high-frequency, small-lot logistics makes it difficult to achieve economies of scale
Difficulty in automating warehouse operations due to their complexity, especially at smaller logistics centers
Key financial data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company executed 2-for-1 stock splits on October 1, 2015, October 1, 2017, October 1, 2019, and January 1, 2021.
Recent updates
Company announces plans to move to a holding company structure
On April 22, 2022, Maruwa Unyu Kikan Co., Ltd. announced that its board of directors had voted to approve a proposal to move to a holding company structure. To accomplish this, the company will first establish a wholly-owned successor preparatory company, to be known as Maruwa Unyu Kikan Successor Preparatory Company, and then split off its logistics and related businesses to be absorbed by the successor preparatory company in an absorption-type company split transaction. Also approved and finalized at the board meeting that same day was the contract between the company and the successor preparatory company covering the absorption-type split transaction, under which the transaction is scheduled to take place on October 1, 2022.
The proposed move to a holding company structure via a company split is subject to the approval of shareholders at the upcoming 49th annual general shareholders meeting (scheduled for June 27, 2022) as well as the approval of the relevant regulatory authorities (as needed).
Goals of move to holding company structure
In addition to ongoing efforts to hire and train the necessary personnel, test and use leading-edge technologies, develop new markets, and otherwise enhance the group's existing core logistics businesses (e-commerce/ordinary-temperature logistics, temperature-controlled logistics for food, and medical/medicine logistics services), Maruwa Unyu group companies are also actively working on to scale up its business continuity planning (BCP) logistics services. However, with the social environment having radically changed in recent years, the logistics industry has undergone unprecedented changes, including widespread restructuring with everything from business alliances to mergers and acquisitions. The company, recognizing the urgent need to create a business structure that will allow group companies to better cope with the changes in this environment, decided to rapidly move to a holding company structure, under which the holding company would handle the job of medium- to long-term strategic planning for the group while the authority and the responsibility for executing those plans would be assigned to individual operating companies. By splitting the company into separate operating companies in this manner, the company aims to speed up decision-making and give individual business units more flexibility to act, thereby creating a stronger foundation for the group to support sustained growth going forward. In short, with the move to a holding company structure the company is looking to:
Upon split off, the successor company will issue 6,400 shares of common stock that will be allotted and delivered in full to Maruwa Unyu Kikan.
Outlook
Because the successor company will be a wholly owned subsidiary of Maruwa Unyu Kikan, the transition to a holding company structure will not have a material impact on consolidated results. However, Maruwa Unyu Kikan will be a holding company because after the split, its income on a standalone basis will mainly come from payments received from group subsidiaries and affiliates (including dividends, management fees, real-estate rental income, and interest received on intra-group loans) while its expenses will only be those necessary to play its role as a holding company (the bulk of which will be interest payable on borrowings).
Result of tender offer for PHYZ Holdings' and transfer of a subsidiary
On March 23, 2022, Maruwa Unyu Kikan Co., Ltd. has announced that, at a meeting held on February 18, 2022, its Board of Directors reached the decision to acquire common shares in PHYZ Holdings Inc. (TSE1: 9325) through a tender offer made in accordance with the Financial Instruments and Exchange Act. Furthermore, the company has announced that the tender offer was made on February 21, 2022 and successfully completed on March 22, 2022.
As a result of this tender offer, PHYZ Holdings will become a consolidated subsidiary of the company on March 29, 2022, the date on which settlement of the tender offer is scheduled to begin.
Number of shares acquired, acquisition price and shares held before and after acquisition
The company is currently examining the impact this tender offer and this acquisition of a subsidiary will have on its performance in FY03/22. According to the company, if it discovers any information that necessitates a revision to its performance forecast or warrants public disclosure, it will promptly make a corresponding announcement.
Tender offer for PHYZ Holdings shares under agreement to form capital and business alliance
On February 18, 2022, Maruwa Unyu Kikan Co., Ltd. announced that it had entered into an agreement to form a capital and business alliance with PHYZ Holdings Inc. (TSE1: 9325). Towards this end, the company will make a formal tender offer for PHYZ Holdings common shares.
At a meeting of the company's board of directors on February 18, 2022, the board voted to approve plans for the formation of a capital and business alliance with PHYZ Holdings Inc. (TSE1: 9325), under which Maruwa Unyu Kikan plans to acquire enough shares to make PHYZ Holdings a consolidated subsidiary. In terms of existing relationships between the two companies, Maruwa Unyu Kikan noted that its President, CEO, and Representative Director, Masaru Wasami, personally held 520,000 shares of PHYZ Holdings common stock, giving him a 4.85% stake and a "special relationship" with the target company. Under the terms of the tender offer, the company will make open market purchases of PHYZ Holdings common shares at a (bid) price of JPY670 per share for a total of 20 business days running from February 21 through March 22, 2022.
By making PHYZ Holdings a consolidated subsidiary, the company said it expects to realize synergies respects.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Notes: Figures may differ from company materials due to differences in rounding methods.
Administrative expense items are calculated based on their share of cost of revenue; hence, the total of administrative expenses and personnel expenses may not be same as cost of revenue.
Full-year FY03/22 results
Summary
In the E-commerce logistics business, in addition to the establishment of MQA (Momotaro Quick Ace), a unique last-mile delivery network in a growth market, the company has expanded its business to include 3PL, a key strength, and is focused on growing its trunk line transport and logistics center operations.
In the cold-chain logistics business, the company offers high-quality, high-value-added logistics services through AZ-COM 7PL (AZ-COM 7 Performance Logistics: 3PL with seven management support functions), tailored to supermarkets. In particular, the company is focusing on improving the freshness of perishable products and helping generate profit in commercial distribution in the supermarket sector through "direct delivery value chain."
The company has also strengthened its BCP logistics business to provide safe, secure, and stable logistics even during times of crisis, and is helping to secure a life line through its logistics operations in collaborations with partner companies based on the AZ-COM Maruwa Support Network. In addition, the company is further promoting the research and introduction of digital transformation (DX) to adapt to changes in the post-pandemic business environment.
Of total revenue of JPY133.0bn, JPY132.0bn (+18.8% YoY) was generated in Logistics and JPY976mn (+1.8% YoY) in the Other segment. Of Logistics segment revenue, JPY67.3bn (+46.1% YoY) was in the E-commerce and Room-Temperature business, JPY44.4bn (-0.8% YoY) in Foods, and JPY20.3bn (+0.1% YoY) in Medicine and Medical. Operating profit was JPY8.4bn (+8.0% YoY).
By segment
Logistics segment
In the E-commerce and Room-Temperature logistics business, which focuses on daily necessities, revenue was JPY67.3bn (+46.1% YoY) as a result of the expansion of the E-commerce Last Mile Same-Day Delivery Service and a large contribution from the provision of logistics services to new customers.
In the Foods business, mainly cold-chain logistics, revenue was JPY44.4bn (-0.8% YoY). There was steady growth in the volume of products handled by customers, including supermarkets and consumer cooperatives, and the company established new logistics centers for supermarkets. However, the closure of some logistics centers and the falloff in shelter-in-place demand in the wake of the COVID-19 pandemic a year ago had a negative impact on revenue.
In the Medicine and Medical business, revenue was JPY20.3bn (+0.1% YoY) as a result of an increase in the volume of goods due to a recovery in mainstay products such as medicines and cosmetics at existing customers, including drugstores, which are major customers of the company.
On the profit front, although results were affected by higher labor and transportation costs in addition to higher unit prices for fuel, the company worked to grow its business proactively through stepping up its sales efforts and enhance productivity through daily results management. As a result, Logistics segment revenue increased 18.8% YoY to JPY132.0bn, and segment profit (operating profit) increased 8.0% YoY to JPY8.4bn.
Other segment
In the document storage business, revenue and segment profit (operating profit) were JPY976mn (+1.8% YoY) and JPY290mn (+3.6% YoY), respectively, as a result of efforts made to take on business process outsourcing (BPO) projects for existing and new clients through aggressive sales activities.
Company outlook for FY03/23
Note: Figures may differ from company materials due to differences in rounding methods.
The company forecasts FY03/23 revenue of JPY171.5bn (+28.9% YoY), operating profit of JPY11.1bn (+28.7% YoY), recurring profit of JPY11.5bn (+26.1% YoY) and net income of JPY7.4bn (+20.5% YoY).
The company has formulated a new medium-term management plan covering the years from FY03/23 to FY03/25. Under the new plan, the company will focus on securing and training personnel to support business expansion and improving productivity through the promotion and application of digital transformation. These measures are in response to the increasing volume of goods in the core domains of e-commerce logistics, cold-chain logistics, and medicine and medical logistics, as well as the growing shortage of personnel and vehicles in operation. Further, the company will strive to maximize economic value by appropriately allocating management resources to concentrate investment in growth businesses and by revitalizing and restructuring low-profit businesses to improve management efficiency. It also plans to create social value by practicing ESG management.
Historical performance versus initial company forecasts
Note: Figures may differ from company materials due to differences in rounding methods.
Medium-term management plan
Medium-term management plan
On May 10, 2022, the company formulated a medium-term management plan covering the three years from FY03/23 to FY03/25. The plan highlights the following priority initiatives.
1) Expand and develop core businesses by tailoring them to the growing logistics demand of growth markets
E-commerce logistics: In the still-growing e-commerce market, the company aims to satisfy customer needs and further expand its business by establishing a highly efficient and reliable integrated supply chain (logistics center operations, trunk line transportation, and last mile deliveries) logistics system.
Cold-chain logistics: The company aims to establish a new business by building a procurement network developed out of AZ-COM 7PL (AZ-COM 7 Performance Logistics: 3PL with seven management support functions, a logistics service tailored to supermarkets), to construct a direct logistics platform that supports various modes of transportation and to improve logistics quality in compliance with the Hygienic Analysis Critical Control Point (HACCP) system.
Medicine and medical logistics: Optimize the logistics network nationwide in line with the management integration of client companies and rebuild logistics centers using state-of-the-art technology to adapt to the expansion of client companies' business and the recovery of demand following the end of the COVID-19 pandemic.
2) Diversify, develop, and optimally allocate personnel in line with the expansion of business scale
The company plans to diversify its recruitment channels to include mid-career recruitment, which provides immediately employable manpower, in addition to conventional aggressive recruitment of new graduates. It will also develop personnel strategically based on the skills and number of personnel required for business expansion. Further, the company plans to use talent management principles to work on the appropriate placement of personnel and prevention of turnover.
3) Proactively introduce digital transformation to achieve innovation in operational productivity in each business domain and back office operations
The company plans to actively implement digital transformation based on the proof of concept testing that it has carried out since the previous medium-term management plan. This includes AI-based automatic dispatching/seeking for freight in transportation and delivery operations, construction of an e-commerce platform, integration of back-office systems to achieve optimization, introduction of robotics in logistics center operations, and supply chain optimization through SIP Smart Logistics (part of the Cabinet Office's Strategic Innovation Promotion Program).
4) Concentrate management resources into businesses that combine growth potential and capital efficiency, and revitalize and reorganize businesses
The company aims to accelerate business growth by measuring the growth potential and investment efficiency of businesses and concentrating management resources in core areas to optimally reinvest the management resources that the company has acquired through its businesses. Moreover, the company plans to revitalize low-profit businesses and restructure unprofitable businesses by identifying improvement drivers in each business through ROIC tree development.
5) Create shared value with society through business activities and corporate governance reform
To fulfill our responsibilities as a listed company on the Prime market, the company plans to reduce greenhouse gas emissions while enhancing environmental and social value through its business activities. It plans to build a robust logistics network to demonstrate its commitment to being a public entity. This involves promoting collaboration based on mutual support among partner companies through the AZ-COM Maruwa Support Network. It also involves providing safe, secure, and stable logistics services in the event of a disaster through the AZ-COM BCP Network. Moreover, the company will work on corporate governance reform with a view to the next generation in order to ensure its continued development.
(Reference) Previous medium-term management plan
Maruwa Unyu Kikan announced its medium-term management plan for FY03/20–FY03/22 in May 2019 and revised it in May 2020. In FY03/19, the company recorded revenue of JPY85.6bn, recurring profit of JPY6.0bn, and ROE of 17.9%. As of May 2019, the company targeted revenue of JPY130.0bn, recurring profit of JPY10.0bn, and ROE of 19.7% in FY03/22. However, the company revised its FY03/22 forecast slightly downward in light of the impact of the COVID-19 pandemic. The revised forecast assumes that the impact of the pandemic will continue through March 2021, and calls for revenue of JPY115.0bn, recurring profit of JPY8.7bn, and ROE of 19.7%.
In November 2020, the company upwardly revised its FY03/21 forecast due to strong demand for at-home meals and firm e-commerce demand, raising its revenue target by JPY10.0bn to JPY110.0bn and its recurring profit target by JPY600mn to JPY8.1bn. It did not, however, revise the numerical targets in its medium-term plan. Actual FY03/21 results were JPY112.1bn in revenue and JPY8.3bn in recurring profit, exceeding the revised forecast by JPY12.1bn and JPY762mn, respectively.
KPIs
The company’s KPI targets include an equity ratio of 45% or higher, a recurring profit margin of 8% or higher, and ROE of 15% or higher, with ROIC of 10% or higher. It also sets more detailed targets for each operation based on over 200 indicators. The company manages daily financial results and shares monthly progress updates at internal meetings. Each center has its own targets for revenue, recurring profit, and recurring profit margin, and the company analyzes progress versus these targets on a monthly basis and formulates improvement measures. The company’s management also quantifies and monitors on-site management. The company believes that management based on data is absolutely necessary to its success. It strives to improve operations through both quantitative (data-based management) and qualitative (improving service through employee mental training) means.
The company has typically focused on improving its financial position, thus targeting negative net debt (interest-bearing debt minus cash and deposits) and an equity ratio of 45% or higher. However, it has changed its stance to focus on forward-looking investments, and plans to raise funds through corporate bonds and borrowings. In December 2020, the company raised JPY20bn by issuing Euroyen convertible bonds with stock acquisition rights maturing in 2025 (conversion price: JPY2,700). As a result, the equity ratio fell 19.3pp YoY to 35.1% in FY03/21. Moving forward, the company targets an equity ratio of 45% or higher. It expects to maintain a minimum equity ratio of 30%, even considering temporary declines due to fundraising as occurred in FY03/21 due to the bond issuance.
The company is pursuing the five following priority measures in the medium-term.
Secure and develop human resources: The company aims to hire 600 new graduates per year. In practice, it hired 321 in FY03/20 and 454 in FY03/21. It also hires mid-career workers in addition to new graduates. The company provides new employees with thorough training in business skills, etiquette, and values in overnight training camp sessions. After completing these sessions, employees from new recruits to executives continue to undergo periodic training in a curriculum that is segmented by rank, job type, and theme.
In the e-commerce market, the company plans to build a last mile delivery network for Amazon Japan and expand the number of Momotaro Quick Ace (MQA) individual contractors: MQA is a business support mechanism to help independent contractors that exclusively deliver packages for Amazon Japan. When an individual joins MQA, Maruwa Unyu Kikan provides him or her with the necessary equipment to make deliveries, including a uniform and a truck on a lease basis. The company also supports these individuals with a revenue guarantee during the training period and provides administrative support when they officially register a business (including tax return support). The company aims to expand its contracted area of operations, especially in Tokyo’s 23 wards and other urban centers.
Expand functions in the cold-chain logistics business: The company plans to build a food logistics platform based on the idea of large logistics centers. This would involve consolidating logistics data and functions of producers, manufacturers, wholesalers, and retailers at a single location to create a logistics network that integrates the supply and demand chains. (See “Business, Overview by segment, Logistics segment: Foods” below for details)
Build model logistics centers incorporating labor-saving systems and automation, supply chain standardization, and data and resource sharing between logistics providers: The company is pursuing digital transformation of job sites. It is currently studying the use of automated driving and drones in transportation and delivery operations, and the use of demand forecasts to manage logistics center operations. The company plans to use digital transformation to share supply chain management data, monitor progress across the group, and improve overall efficiency.
Utilize the AZ-COM Maruwa Support Network to address the shortage of personnel and trucks: The AZ-COM Maruwa Support Network is a membership-based network of mainly small and medium-sized trucking companies. With it, the company has been able to build a nationwide network of chartered trucks. It also plans to strengthen its business continuity planning (BCP) network and related logistics infrastructure to be able to provide stable logistics in times of emergency.
Business
Business model
Company overview
Maruwa Unyu Kikan provides 3PL and transportation and delivery services for retailers. In the provision of 3PL, the company first works with customers to select a site and design for a logistics center, from which point it proposes systems for warehouse management, picking, packing, sorting, and pre-shipment inspection, as well as transportation schedules and reverse logistics arrangements.
3PL stands for “third-party logistics” (where manufacturers are considered the first party, wholesalers and retailers the second party, and logistics providers the third party). The Council of Ministers defined the term in April 1997 as “a business that proposes logistics reforms to shippers and provides comprehensive logistics services.” 3PL is concerned with centralized management of logistics.
“Transportation and delivery” refers to the transportation of goods over relatively long distances and the delivery of goods to buyers. It includes general freight, light freight such as for Amazon Japan’s last mile delivery and supermarket e-commerce, less-than-truckload (LTL), and railroad freight.
In FY03/21, the ratio of 3PL to transport and delivery in the company’s consolidated revenue was 7:3. The company either shoulders the entire logistics process (3PL) or handles only transportation and delivery depending on the customer’s needs. 3PL revenue is based on a set percentage of the cost of goods sourced by the customer as detailed in the service contract. The cost of goods includes transportation and shipping, warehousing, packing, pre-shipment inspection, and other costs. The company sets prices with the goal of achieving a recurring profit margin (RPM) of 8% or higher.
In general, goods are produced by manufacturers and sent to wholesalers who distribute them to retailers. Food products (going through the market) are delivered from producers to Japan Agricultural (JA) or other cooperatives, from which they enter the wholesale market (wholesalers and other intermediaries), before finally finding their way to retailers. The flow of goods in logistics is divided into upstream, midstream, and downstream. Upstream includes transportation from manufacturers, midstream refers to wholesaler operations, and downstream indicates delivery to retailers. The reason why Maruwa Unyu Kikan specializes in logistics for retailers, the downstream part of the industry, is because it believes that retailers stand to gain significantly from commercial distribution opportunities proposed by the company. The company makes commercial distribution proposals to its customers in addition to logistics proposals, rather than leaving commercial distribution to wholesalers and retailers.
“Commercial distribution” refers to the flow of buying and selling activities that transfer ownership of goods in a series of processes from production to consumption. Logistics, or physical distribution, on the other hand, is merely concerned with handling and transporting goods, and is completely removed from issues of ownership of the goods transported. Traditionally in Japanese logistics, there have been many cases where wholesalers have controlled commercial distribution while also carrying out logistics. However, in these cases, logistics services are only a part of commercial distribution, and are merely considered a cost item.
For instance, Paltac Corporation (TSE1: 8283), the largest wholesaler of household products, reported FY03/21 revenue of JPY1.0tn, gross profit of JPY81.2bn, and operating profit of JPY25.5bn. Transportation costs accounted for JPY4.0bn of the cost of revenue (0.4% of revenue) and JPY12.3bn of SG&A expenses (1.2% of revenue), which sums up to only JPY16.4bn (1.6% of revenue). This is a small amount compared to the JPY81.2bn in gross profit earned from commercial distribution. Paltac pursues a strategy of lowering truck leasing costs and earning profits from commercial distribution.
In recent years, the shortage of truck drivers has made it more difficult to hire trucks. This has led to a trend of separating commercial distribution and logistics. Isolating logistics functions from commercial distribution allows for easier monitoring of quality, delivery times, and costs. The separation of the two also allows customers to concentrate on commercial distribution alone. The company has been promoting the separation of logistics and commercial distribution since before the idea became widespread in Japan.
While wholesalers deliver goods by the case only, the company delivers individual goods, packing them one at a time in crates at its logistics centers and making daily deliveries to retailers’ stores. In this way, it delivers products to consumers in the required quantities and at the required time. This eliminates the need for supermarkets to dispose of overstocked products, leading to an improved cost ratio. However, the work of sorting and delivering tens of thousands of products to stores at the logistics center every day is complicated and difficult to mechanize.
Maruwa Unyu Kikan targets growing markets and customers based on the idea that customer growth will spur company growth. For example, in the area of supermarkets, it preferentially targets candidates who open more than six or seven stores per year. The company’s policy is to pursue business with companies that are growing at a relatively rapid pace.
Structure of 3PL contracts
The company enters into logistics outsourcing contracts with customers for periods of around five years. The contracts mostly renew automatically, and there are only a few cancellations over a typical ten-year period. Payments are based on a set percentage of the cost of goods sourced by the customer (or the cost of goods excluding logistics costs) that pass through the company’s logistics centers. This rate is set on a case-by-case basis, and the contract states that it is to be reviewed every few years. For example, if a retailer’s revenue is “100” and the cost of goods sourced is “80,” in case there is a 50% commission, the company would earn “40.” The company sets its rate based on product category (chilled, foods, beverages, household products, etc.). The contract stipulates that in case of significant changes in the composition of product categories handled, the parties must discuss possible changes to the rate. Further, the contract specifies a guaranteed minimum rate in case there is a significant drop in customer revenue.
The company negotiates the rate with a minimum recurring profit margin of 8% in mind. For customers who it will not make an 8% RPM on, the company proposes, for example, adjusting delivery times to night or early morning, or reducing the frequency of deliveries. In such cases, it reduces costs by reducing volume (frequency) while maintaining the delivery unit price. The company does not want to lower the delivery unit price because it draws personnel expenses and truck leasing costs from it. While the cooperation of the customer is required to lower the contract amount, the company uses a gain-sharing system with customers, which motivates them to cooperate with the company in improving profits.
The company typically negotiates directly with its retailer customers’ management since their logistics departments and merchandise departments are not always able to see the whole picture. The company holds a monthly meeting with each customer in which they set targets for monthly and yearly earnings and determine how profit will be shared. This also helps to maintain relationships with existing clients.
Other businesses
In addition to Logistics, the company is involved in other businesses such as document management and real estate leasing. These businesses account for only a small fraction of the company’s business, however: 0.9% of revenue in FY03/21 (99.1% for Logistics) and 3.5% of operating profit (96.5%).
Logistics segment domains
The Logistics segment (99.1% of revenue in FY03/21) comprises three domains based on customer type: E-commerce and Room-Temperature, which handles room-temperature logistics (e.g., furniture and household goods) and e-commerce logistics for Amazon Japan and other companies; Foods, which focuses on cold-chain logistics for supermarkets; and Medicine and Medical, which handles logistics for Matsumotokiyoshi Holdings and pharmaceutical wholesalers.
E-commerce and Room-Temperature
In this domain, the company handles logistics operations for Duskin Co., Ltd., Nitori Co., Ltd., Crown Package Co., Ltd., and Ryohin Keikaku Co., Ltd., among others. While the company’s customers include major companies such as Ryohin Keikaku and Nitori, its relationships with these companies are basically limited to the Kanto area. The company plans to expand its business across the country using the Kanto region, where it has a strong presence, as a foothold. In addition to serving these customers, the company entered the e-commerce business in 2017. Although Japan’s e-commerce ratio is growing, it is still low compared to overseas markets (see “Market and value chain”). Anticipating growth of the market, the company became a partner of Amazon Japan G.K. in 2017 to handle last mile deliveries. It currently conducts the most last mile deliveries of any regional courier. Moving forward, the company plans to expand its contract with Amazon Japan to include trunk line transportation and logistics center operations.
Foods
Maruwa Unyu Kikan began providing logistics services for supermarkets in 2013. Mr. Wasami, the company’s founder and president, accumulated know-how in supermarket management thanks to his experience in the greengrocer business, and also in supporting the restructuring of bankrupt supermarkets at the request of the Resolution and Collection Corporation. For example, when supermarkets purchase vegetables from producers, they usually go through wholesalers and other intermediaries, each of which takes a fee. Mr. Wasami recognized that he could source produce directly from producers to cut out the middlemen and reduce costs. This could improve the GPMs of supermarkets by up to five percent. The company proposes the idea, and the supermarkets and producers work out the details themselves. Since there is no middleman, the time it takes produce to make it from harvest to supermarket shelves is reduced from three days to one or one-and-a-half days, which improves freshness. In this way, the company makes commercial distribution proposals in addition to logistics proposals.
Cold-chain logistics refers to keeping products at a certain temperature during the entire logistics process. This makes it possible to preserve perishable foods for a long time and distribute them over a wider area. It also helps to reduce food waste because it helps to maintain freshness up to the point of delivery. Food logistics can be divided by temperature into room-temperature, refrigerated, and frozen.
The company has developed Japan’s first cool containers for Japan Freight Railway Company with remote temperature control functionality. The containers allow onions, potatoes, and other produce to be transported while maintaining their freshness. Demand for rail transportation is growing amid the decline in the number of long-distance truck drivers. The company has the largest number of cool containers of any shipping company.
Medicine and Medical
The company began doing business with Matsumotokiyoshi Co., Ltd. in 1995 (now Matsumotokiyoshi Holdings Co., Ltd.) in 1995. During his overseas visits to the US and Europe, Mr. Wasami predicted that drugstores would expand in Japan following supermarkets and convenience stores. He proposed that Matsumotokiyoshi outsource logistics to Maruwa Unyu Kikan so it could focus on opening more stores. At the time, Matsumotokiyoshi was inspecting its products in-house before they were delivered to stores, which required 1.7 inspection workers per store. Maruwa Unyu Kikan offered to not only transport Matsumotokiyoshi’s products, but also undertake inspection and inventory management. The company had a successful track record in product inspection for cosmetics wholesaler Ohyama Company, Ltd. (unlisted), and used this to convince Matsumotokiyoshi to start doing business with it in 1995.
Currently, Alfresa Corporation and Paltac Corporation are also customers in this area.
By customer
The table below shows the company’s revenue from major customers Matsumotokiyoshi Holdings and Amazon Japan versus that from other customers. Revenue from the two major customers is driving the company’s revenue growth.
Note: Figures may differ from company materials due to differences in rounding methods.
Development of business continuity planning (BCP) as a business
Starting in 2019, the company has been entering into agreements with local governments and companies to support their business continuity planning (BCP) activities. Local government partners in the Kanto region include Tokyo and the prefectures of Saitama, Chiba, and Kanagawa, and the cities of Saitama, Chiba, and Yokohama. Nationwide local government partners include the prefectures of Miyagi, Osaka, and Fukuoka, and the cities of Sapporo, Ishikari, Nihonmatsu, and Kochi. Meanwhile, corporate partners include Seven-Eleven Japan, Co., Ltd. (a subsidiary of Seven & i Holdings Co., Ltd. [TSE: 3382]), Coca-Cola Bottlers Japan Inc. (a subsidiary of Coca-Cola Bottlers Japan Holdings Inc. [NASDAQ: COKE]), and Japan Association of Chain Drug Stores (JACDS). The support the company offers for BCP involves providing trucks and rapid delivery of relief supplies in the event of a disaster. The company once provided support free-of-charge when a disaster occurred, but with abnormal weather and natural disasters likely to become more common in the future, the company believes it is necessary to commercialize contingency logistics. It also believes in the necessity of drawing up disaster response plans in advance rather than merely reacting when disaster strikes.
In the future, the company aims to provide support to governmental and private organizations related to management of inventories, expiration dates, and warehousing for emergency supplies. For example, local governments stockpile supplies for earthquakes, but there are many stockpiling centers and in many cases these institutions do not keep track of which supplies are kept in which locations. Some of the stockpiled items have specific expiration dates that also need to be kept track of. Moreover, the company’s temperature control technology can also be used to extend the shelf life of supplies. The company believes that the government tends to stockpile more items than are necessary to meet budgets, and that the private sector can handle the task more efficiently.
Earnings structure
As of end-FY03/21, the group had a total of 166 logistics centers (161 as of April 1, 2020), including 93 in the Kanto region (89), six in Hokkaido (six), nine in the Tohoku region (11), 21 in the Kansai, Chubu, and Hokuriku regions (22), six in the Chugoku and Shikoku regions (eight), and three in Kyushu (five). In other affiliated companies (non-3PL), the company had 15 logistics bases in the light freight business (12), five in the railway container business (five), three in the document storage business (three), and five in the e-commerce logistics business (none; including the centers of Japan Logistics Development Co., Ltd., which it acquired in September 2020). The company has a nationwide transportation and delivery network of partners through its AZ-COM Maruwa Support Network in addition to its Momotaro-bin fleet, which handles light freight delivery.
AZ-COM Maruwa Support Network
In 2005, the Act on Advancement of Integration and Streamlining of Distribution Business came into effect, which established a system of support for businesses recognized as working to improve the efficiency of logistics by saving labor and reducing environmental impact. Taking advantage of this system, Maruwa Unyu Kikan had the opportunity to reform the logistics operations of the All Japan Wholesalers’ Association. The company’s own transportation capabilities were not sufficient to handle the nationwide operations of the association, so it set about establishing a nationwide transportation network by providing logistics management know-how to partner companies. This was the start of what would become the AZ-COM Maruwa Support Network.
Maruwa Unyu Kikan established the AZ-COM Maruwa Support Network, a membership-based network of mainly small and medium-sized trucking companies, in 2015. The company has used the system to extend its reach by gaining access to leased trucks (delivery trucks provided by other companies) across Japan. Member companies numbered 139 in 2015, but had grown to 1,530 by March 2021. The company is targeting 10,000 members by 2030. It provides a number of service options to its partners to solve issues in their businesses, including joint purchasing of trucks, fuel, and consumables to reduce costs, and support for hiring and personnel development.
Cost analysis
In FY03/21, the company had a high cost of revenue ratio of 88.1% and an SG&A ratio of 4.8%. Of cost of revenue items, truck leasing costs accounted for the largest part of revenue at 42.0%, followed by labor costs at 24.6%, subcontracting and outsourcing costs 7.2%, and fuel and oil costs 1.0%. Comparing figures since the company began disclosing them in FY03/15, we can see that the share of truck leasing costs to revenue increased from 33.3% in FY03/15 to 42.0% in FY03/21, labor costs decreased from 32.5% to 24.6%, subcontracting and outsourcing costs increased from 6.0% to 7.2%, and fuel and oil costs decreased from 2.1% to 1.0%. The company has been increasing its use of leased trucks and outsourcing to make costs more variable. The overall cost of revenue ratio declined by 0.8pp, from 88.9% in FY03/15 to 88.1% in FY03/21.
Maruwa Unyu Kikan manages its accounts on a daily basis to control costs. By doing so, it is able to predict future logistics volumes and control labor costs accordingly. When making forecasts, the company analyzes various factors such as air temperatures and the dates of weekends and holidays, in addition to comments and feedback from its customers. The company is promoting digital transformation in its daily accounting by accumulating and utilizing big data. Its policy is to use data and digital processes for tasks that have traditionally relied on the experience and intuition of workers. The company currently forecasts revenue three months out. However, it will be able to control costs such as labor costs and truck leasing costs more precisely if it is able to make forecasts on a monthly or weekly basis. The company plans to digitalize these operations in FY03/22 and FY03/23.
Notes: Figures may differ from company materials due to differences in rounding methods.
Administrative expense items are calculated based on their share of cost of revenue; hence, the total of administrative expenses and personnel expenses may not be same as cost of revenue.
Overview by segment
Logistics: E-commerce and Room-Temperature (41.2% of overall revenue in FY03/21)
Summary
3PL for retailers, mainly of household goods, and home deliveries for Amazon Japan G.K.
Main customers
Amazon Japan, Ryohin Keikaku, Duskin, and Crown Package (an unlisted packaging manufacturer).
The company has been growing rapidly since it became a last mile contractor for Amazon Japan in FY03/18. Amazon Japan accounted for JPY26.2bn of the segment’s JPY46.1bn revenue in FY03/21.
Revenue from Amazon Japan
Prior to FY03/18, Yamato Holdings Co., Ltd. (TSE1: 9064) handled transportation of most of Amazon Japan’s parcels. Due to the rapid expansion of e-commerce and significant increase in the volume of cargo and the tight supply of labor, Yamato drivers became extremely busy, and in November 2016, the government sent Yamato a corrective action recommendation for not paying its drivers overtime. The upshot was that Yamato implemented volume controls and raised prices in FY03/18 to improve the working environment for its employees. Yamato also stopped providing same-day deliveries for Amazon Japan.
Maruwa Unyu Kikan seized this opportunity to enter the home delivery field in earnest. The company established a delivery network by setting up Momotaro Quick Ace (MQA), a scheme to support individual contractors. It also streamlined operations by limiting handling to a single company, Amazon Japan, and by specializing in delivery at the exclusion of pickup. These improvements allowed it to offer same-day deliveries.
MQA is a network of (and support system for) independent business operators exclusively carrying out home deliveries for Amazon Japan. When an individual joins MQA, Maruwa Unyu Kikan provides him or her with the necessary equipment to make deliveries, including a uniform and a truck on a lease basis. It also supports these individuals with a revenue guarantee during the training period and provide administrative support when they officially register a business (including tax return support).
Maruwa Unyu Kikan has been able to achieve high profit margins despite conducting the high-frequency, small-lot deliveries demanded by Amazon Japan. Behind the high margins are the facts that its operations are limited to high-efficiency areas that are densely populated and close to major transportation lines; that it deals with only one client (Amazon Japan); and that it does not provide pickup services. The company aims to expand its contracted area to cover all 23 wards of Tokyo and other urban areas. It is not currently considering working with any e-commerce companies other than Amazon Japan.
Amazon.com Inc.’s approach to logistics
Amazon.com has been using United Parcel Service, Inc. (NYSE: UPS), the largest courier service in the US, since its establishment in 1995. However, based on its customer-first philosophy, Amazon.com has been trying to diversify delivery providers for the last mile to ensure it will be able to complete deliveries even when faced with sudden surges in volume. This has resulted in Amazon.com, as of 2012, using UPS for 30% of deliveries, FedEx Corporation (NYSE: FDX) for 17%, the United States Postal Service (independent agency of the US federal government) for 35%, and local couriers for 18%. It also birthed Amazon Flex during the busy season of 2015, which will allow ordinary people to make deliveries during their free time (source: “Amazing Logistics Strategy” by Ryoichi Kakui; PHP Institute, Inc.)
A similar trend is occurring at Amazon Japan. According to a survey by Uketoru Co., Ltd., which develops an app to solve the redelivery problem, Amazon Japan’s delivery breakdown by courier in April 2017 was 71.4% for Yamato Holdings Co. Ltd., 2.9% for SG Holdings Co., Ltd., and 5.0% for smaller delivery provider partners and Amazon Flex members. These ratios had changed drastically by May 2019, with Yamato Holdings accounting for 31.8%, JP-Holdings, Inc. for 23.2%, SG Holdings for 3.8%, and smaller delivery provider partners and Amazon Flex members for 41.2%. Amazon Japan has reduced the ratio of deliveries conducted by Yamato Holdings, the largest courier in Japan, while increasing the ratio conducted by smaller delivery provider partners and Amazon Flex members.
When working with smaller delivery providers, Amazon Japan pays the rent for logistics bases and allows them to use its systems, which enables Amazon Japan to control the delivery process from end to end. To ensure high quality deliveries, formerly the strength of major couriers, Amazon Japan carefully manages every detail when working with delivery providers like Maruwa Unyu Kikan. Amazon Japan has also implemented the Amazon Flex system, in which it directly outsources work to independent drivers.
Maruwa Unyu Kikan’s strategy
In response to this shift, the company has begun to receive orders from Amazon Japan for upstream services such as trunk line transportation (inter-facility transportation) and logistics center operations (warehousing) in addition to downstream services. For trunk line transportation, the company has established a 24/7 system with three people operating each truck in shifts. It is difficult to say whether upstream or downstream services are more profitable since downstream services are more profitable in areas with high freight volumes and less profitable otherwise. The company’s policy is thus to focus on increasing the overall scale of its business.
In Q4 FY03/20, trunk line transportation and logistics center operations accounted for only 10% of revenue from Amazon Japan, but this ratio rose to 24% in Q4 FY03/21. Trunk line transportation and logistics center operations each accounted for roughly half of the 24%. The company currently handles operations at small and medium-sized logistics centers, but hopes to expand its operations to include large fulfillment centers in the future.
Logistics: Foods (40.0% of overall revenue)
Summary
3PL for supermarkets and transportation and delivery services for online supermarkets. Started full-scale operations in 2013.
Main customers
Coop Tohoku (unlisted; consumer cooperative in the Tohoku region), Co-op Shiga (unlisted; consumer cooperative in Shiga Prefecture), Co-op Mirai (unlisted; supermarket), Lopia Co., Ltd. (unlisted; supermarket), Yamazawa Co., Ltd. (TSE1: 9993), Belc Co., Ltd. (TSE1: 9974), M.I. Foodstyle Corporation (unlisted; acquired Queen’s Isetan from Isetan Mitsukoshi Food Service in March 2018), Ujie Super Co., Ltd. (unlisted; supermarket).
Maruwa Unyu Kikan mainly handles home delivery services for Coop Tohoku, Co-op Shiga, and Co-op Mirai. It does not undertake supermarket logistics operations for these customers. For other supermarkets, e-commerce only accounts for a small percentage of revenue. As the rate of e-commerce in Japan is particularly low for food products (see “Market and value chain” for details), the company’s online home delivery business is structured in a way that will allow it to expand as supermarkets become more e-commerce-oriented.
Food logistics platform
Maruwa Unyu Kikan is currently building one of the largest new food logistics centers in Japan to serve as a food logistics platform. It plans to spend a total of JPY40.0bn on the project. The company acquired the construction site in March 2020 for approximately JPY7.6bn. The site is part of an industrial park development project that the Saitama Prefectural Public Enterprise Bureau, together with the town of Matsubushi, started in FY2018 to respond to the expansion needs of local companies, create jobs, and revitalize the local economy. It is located in an extremely advantageous position in terms of transportation, 30km from the center of Tokyo and not far from the interchange at Tajima in Matsubushi, Saitama Prefecture, on the Higashi Saitama Road, which is scheduled to be extended. The company plans to finish two five-story logistics centers on the 119,008sqm plot in 2025. These will provide service 24 hours a day, 365 days a year, which will enable the company to deliver fresh produce to consumers directly from producers more quickly. The company also plans to recruit technical trainees from overseas and set up housing for 1,000 people.
The company believes that demand for new food logistics centers is high because of the potential to do business with large customers; the expansion of low-temperature logistics; robust demand for large, state-of-the-art centers that improve efficiency; and the fact that many supermarkets have not yet adopted 3PL. New centers can be used in part to consolidate logistics operations of the company’s existing customers.
Following the startup of operations at the first building ("Building A") in 2025, plans call for a phased buildup of operations at the second building ("Building B"). In the end, the company is looking for these two five-story logistics centers to generate combined revenues of JPY25.0bn and realize an operating profit margin of some 7% to 8%, but added that reaching this goal would probably take five or more years.
As Maruwa Unyu Kikan had JPY33.2bn in fixed assets in FY03/21, the development represents a major investment that would more than double its fixed assets. Since the company does not disclose detailed earnings forecasts for its food logistics platform, the following are Shared Research estimates. The company targets an ROIC of 10%. Without taking into account the interest rate on interest-bearing debt, operating profit after tax should be JPY4.0bn for the total planned capex of JPY40.0bn. At the FY03/21 tax rate of 33.0%, operating profit before taxes should be JPY6.0bn. Assuming the FY03/21 OPM of 7.2%, the company would need revenue of JPY83.3bn to achieve profit of this level. The company’s revenue in Foods in FY03/21 was JPY44.8bn, which means the company will need to nearly double revenue to reach this profitability threshold.
In December 2020, the company raised JPY20.0bn by issuing Euroyen convertible bonds with stock acquisition rights maturing in 2025 (conversion price: JPY2,700). The company used approximately JPY12.3bn of this amount for land acquisition and construction of the new food logistics center.
Overseas expansion
The company is looking to develop its expertise in low-temperature logistics overseas, especially in China. The company believes that demand for fresh food in China will grow as the country’s economy expands. The company has set up an institute in China to research the country’s logistics needs as a first step.
Logistics: Medicine and Medical (18.1% of overall revenue)
Summary
The company carries out 3PL for Matsumotokiyoshi Holdings Co., Ltd. and pharmaceutical wholesalers.
Major customers
Matsumotokiyoshi Holdings (TSE1: 3088; drugstores), Alfresa Holdings Corporation (TSE1: 2784; pharmaceutical wholesaler), and Paltac Corporation (TSE1: 8283; pharmaceutical wholesaler).
Of the JPY20.3bn in revenue in FY03/21, JPY14.2bn was from Matsumotokiyoshi Holdings, which has been the company’s business partner since 1995.
Business integration between Matsumotokiyoshi Holdings and cocokara fine Inc.
In October 2921, Matsumotokiyoshi Holdings merged with cocokara fine Inc., establishing a holding company via a joint share transfer. Each company issued a statement in January 2020 that cited “improved logistics efficiency and reduced logistics costs per store” as one of the synergies expected from the merger. Since Matsumotokiyoshi Holdings will take the initiative in the business integration, Shared Research believes that it is highly likely that cocokara fine will transfer its logistics operations to Matsumotokiyoshi Holdings. cocokara fine divided its logistics operations among several companies, which resulted in low efficiency. It would be most efficient for Maruwa Unyu Kikan to assume all of the two companies’ logistics operations.
In November 2021, Maruwa Unyu Kikan submitted a proposal outlining how it could handle the logistics needs of the newly merged entity. According to the company, roughly three years will be needed to complete the merger of the logistics operations of the Matsumotokiyoshi and cocokara fine drug store chains, during which time it would need to add large logistics centers not only in the Kyushu, Kansai, and Nagoya areas, but also in the Osaka and Kanto areas.
Other businesses
Document storage
The company provides comprehensive document management support that covers the drafting of documents to their disposal, including storage of original documents (various application forms and contracts), document search and digital viewing through online applications, and the digital conversion of paper documents.
Real estate leasing
The company provides rental management services for buildings, parking lots, and other properties, mainly in the Tokyo metropolitan area.
Market and value chain
Market overview
Domestic freight volume
According to Nittsu Research Institute and Consulting’s “Japan’s Economic and Freight Outlook for FY2021 (Revised),” the total volume of freight transported in FY2020 decreased by 6.7% YoY. In terms of FY2020 freight volume by category, the report estimated consumption-related freight as declining by 5.8% YoY, production-related freight by 9.4% YoY, and construction-related freight by 5.4% YoY.
The report expects total freight volume in FY2021 to increase by 4.5% YoY. In terms of freight volume by category in FY2021, the report forecasts consumption-related freight to increase by around 3.3–3.7% YoY due to a rebound from the decline in FY2020, production-related freight to increase by around 5.3–5.7% YoY on the expected recovery in industrial production, and construction-related freight to decline by around 1.3–1.7% YoY due to sluggishness in new housing starts and the low likelihood of the execution of large-scale public works projects.
Note: Change in freight volume calculated on a metric ton basis
Note: Freight volume by category includes ground and coastal shipping
Logistics cost ratio trends
According to the Japan Institute of Logistics Systems’ “Logistics Costs Survey,” the average company’s logistics cost ratio peaked at 6.58% in 1996 and has since trended downward. That said, the ratio rose briefly to 5.01% in FY2006 due in part to soaring fuel prices. However, it remained in the high 4% range from FY2007 to FY2020. The decline was due to a fall in freight rates, a reduction in procurement and logistics costs as overseas production expanded, and logistics efficiency improvements that eliminated waste. However, in 2020, the rate rose significantly to 5.38% mainly due to the increase in truck freight rates and freight handling costs from the ongoing labor shortage of recent years. 3PL is gaining in significance as shippers’ needs become more diverse and as it becomes more common to outsource logistics.
Japan’s 3PL market
According to Logi-Biz, a monthly publication on logistics management, the market for 3PL in Japan exceeded JPY1.0tn in 2005 and reached JPY1.3tn in 2007. However, due to the impact of the global financial crisis, the market shrank for two consecutive years in 2008 and 2009. The market then recovered to JPY1.5tn in 2010 and has continued to expand since then.
Growth of e-commerce
The size of the e-commerce market in Japan was JPY19.4tn in 2019, growing at an average annual rate of 8.6% over the five years through 2019. The e-commerce penetration rate in Japan was 6.8% in 2019 (+0.6pp YoY), lower than the 11.0% penetration rate in the US (+1.1pp YoY). Shared Research believes that there is room for an increase in this rate over the medium term. Nomura Research Institute forecasts the size of the domestic e-commerce market to reach JPY29.4tn in FY2026, approximately 1.5x the size of the market in FY2019 (forecast as of January 2021).
Of FY2019’s JPY19.4tn e-commerce market, JPY10.1tn was in merchandising sector, JPY7.2tn in the service sector, and JPY2.1tn in the digital sector. Maruwa Unyu Kikan’s e-commerce business falls under the merchandising sector. The main breakdown of the merchandising sector is as follows: foods, non-alcoholic and alcoholic beverages, JPY1.8tn; consumer electronics, audio-visual equipment, and PC devices, JPY1.8tn; books, video, music, and software, JPY1.3tn; cosmetics and pharmaceuticals, JPY0.7tn; household sundries, furniture, and interior goods, JPY1.7tn; and clothing and accessories, JPY1.9tn.
In 2019, the e-commerce rate for the merchandising sector was 2.9% for foods, non-alcoholic and alcoholic beverages; 32.8% for household appliances, AV equipment, and PC devices; 34.2% for books, video, music, and software; 6.0% for cosmetics and pharmaceuticals; 23.3% for household sundries, furniture, and interior goods; and 13.9% for clothing and accessories. Foods, non-alcoholic and alcoholic beverages have low e-commerce rates.
Barriers to entry
According to the Japan Trucking Association’s “Japan’s Trucking Industry 2020: Current Status and Issues,” the total market size of the domestic logistics business in FY2016 was JPY24tn (JPY26tn in FY2015), of which operating revenue from the trucking business was JPY14.5tn (JPY15.9tn in FY2015). In other words, trucking accounted for approximately 60% of the domestic logistics market.
Two laws on logistics that came into effect in 1990 lowered the barriers to entry to the trucking business by replacing the former system based on licensing to one based on permits. This resulted in the number of operators increasing from 40,072 in FY1990 to 63,122 in the peak year of FY2007, or by roughly 1.5x. The number has hovered around 63,000 since FY2005, with 1.0% to 3.0% of the total number of businesses entering or exiting the market annually.
There are a huge number of small trucking businesses, and according to the Japan Trucking Association’s “2017 Business Analysis Report,” only 60% of them have a recurring profit in the black (61% in the 2015 edition).
Truck driver trends
According to the Japan Trucking Association’s “Japan’s Trucking Industry 2020: Current Status and Issues,” as of 2019, trucking employed approximately 1.96mn employees (1.93mn in 2018), of which 870,000 (860,000 in 2018), or 44%, were engaged in transport or the operation of machinery (most were truck drivers).
The road freight transport business, which includes trucking, is dependent on a primarily middle-aged and older male workforce. There is the fear that a labor shortage will develop due to the lack of young employees entering the profession. Not only the average age of the workforce is high, but the already low number of workers under the age of 40 is declining. In 2019, the ratio of workers under 40 in the road freight industry was about 27%, reflecting a gradual decrease from about 40% in 2008.
Reasons for the aging workforce include the harsh working environment with low wages, long working hours, and the constant risk of traffic accidents, as well as the onerous driver’s license system. In 2019, the average annual income of employees in all industries was JPY5.01mn (JPY4.97mn in 2018), while that of truck drivers was JPY4.56mn (JPY4.57mn) for heavy trucks and JPY4.19mn (JPY4.17mn) for medium and light trucks.
Competitor trends
We can divide logistics companies engaged in 3PL into three major categories: upstream, midstream, and downstream. Upstream refers to transportation from manufacturers, midstream to wholesaling, and downstream to delivery to retailers. Upstream players include Hamakyorex Co., Ltd. (TSE1: 9037), KRS Corporation (TSE1: 9369), and Nichirei Logistics Group Inc. (a subsidiary of Nichirei Corporation [TSE1: 2871]). KRS and Nichirei Logistics Group were originally divisions of food manufacturers. The midstream is occupied by wholesalers such as Nippon Access, Inc. (unlisted). The downstream market is where Maruwa Unyu Kikan is positioned, in addition to Hitachi Transport System, Ltd. (TSE1: 9086), SBS Holdings, Inc. (TSE1: 2384), and others. Nippon Access, a wholesaler focusing on food products, is also involved in downstream operations. SBS Holdings competes with the company in last mile deliveries in the e-commerce market.
In practice, Maruwa Unyu Kikan competes with companies that provide warehouse operations in addition to transportation functions. Hitachi Transport System was originally spun off from the transportation division of Hitachi, Ltd., but now Hitachi only accounts for a little less than 20% of its revenue. Hitachi Transport System provides logistics in the upstream, midstream, and downstream markets, and is also involved in heavy freight and forwarding. It is difficult for large companies to handle some types of warehouse operations due to their complexity, while small companies are unable to serve the needs of large retailers with nationwide operations. One of the differences between the company and its competitors is that the company sees logistics not as a cost center, but as a part of the business process that can be leveraged to generate profits.
Strategic capital and business alliance with Trancom Co., Ltd.
In June 2018, the company entered into a strategic capital and business alliance with Trancom Co., Ltd., which is engaged in 3PL, the matching of cargo and trucks in trunk line deliveries between logistics bases, and temporary staffing. Initially, the companies were considering launching a joint venture leveraging Maruwa Unyu Kikan’s AZ-COM Maruwa Support Network and rail transportation business and Trancom’s cargo and truck matching business and temporary staffing business. Currently, the tie-up is on hold at the management level, but the companies are working together at the operational level to take advantage of each other’s transportation capabilities. In the 3PL business, Trancom operates mainly in Tokyo, Nagoya, and Osaka, and has Maruwa Unyu Kikan take on 3PL work in areas outside of its coverage. Maruwa Unyu Kikan meanwhile uses Trancom for its trunk line transportation.
The company’s basic policy is not to directly compete with rivals. This is because its proposals incorporate both logistics and commercial distribution, and it believes that if customers understand what it does, it should not have to compete head-on. Competing head-on tends to lead to price (cost) competition, and the company’s policy is to avoid price competition because it strives to differentiate itself instead on the quality of its services and the added value it brings to logistics and commercial distribution. In terms of costs, the company manages its accounts on a daily basis, and controls the number of personnel (labor costs) by projecting future logistics volume. It does not try to win contracts by lowering the price per truck. Instead, the company proposes adjusting delivery times to nighttime or early morning, or reducing delivery frequency, for example. The company believes that the superiority of its service lies in the thoroughness of its employee training. The company provides new employees with thorough training in business skills, etiquette, and values in overnight training camp sessions. After completing these sessions, employees from new recruits to executives continue to undergo periodic training in a curriculum that is segmented by rank, job type, and theme.
Strengths and weaknesses
Strengths
The ability to combine logistics proposals with commercial proposals that boost profits for its customers
When the company engages with retailers it proposes commercial distribution solutions, which involve the transfer of ownership of goods, in addition to logistics (physical distribution) solutions. Mr. Wasami, the company’s founder and president, originally operated a greengrocer business and has experience in restructuring bankrupt supermarkets, so is familiar with supermarket management. As a result, Maruwa Unyu Kikan is able to incorporate commercial distribution proposals when selling logistics solutions to retailers. Profits generated from the proposals are shared between Maruwa Unyu Kikan and its customers, who are often happy to cooperate. The company specializes in a narrow range of customer industries—namely, household products, foods, and pharmaceuticals and medical products—to build up greater expertise in each.
Thorough employee training that enhances teamwork and service provision at complex job sites
The company refers to its corporate culture as “Momotaro culture” after the Japanese folktale of the same name. The company uses Momotaro as an allegory to promote the “three elements of management foresight”—thoughtful action, knowledge, and information—represented respectively by the dog, monkey, and pheasant. The company provides new employees with thorough training in business skills, etiquette, and values in overnight training camp sessions. These include exams on greetings, bowing, and other etiquette, which are conducted until all employees pass. After passing these sessions, employees from new recruits to executives continue to undergo periodic training in a curriculum that is segmented by rank, job type, and theme.
The company refers to its corporate culture as “Momotaro culture” after the Japanese folktale of the same name. The company uses Momotaro as an allegory to promote the “three elements of management foresight”—thoughtful action, knowledge, and information—represented respectively by the dog, monkey, and pheasant. The company provides new employees with thorough training in business skills, etiquette, and values in overnight training camp sessions. These include exams on greetings, bowing, and other etiquette, which are conducted until all employees pass. After passing these sessions, employees from new recruits to executives continue to undergo periodic training in a curriculum that is segmented by rank, job type, and theme.
The company’s growing nationwide network of leased trucks and its system for coordinating them
Maruwa Unyu Kikan has had success in building external networks of leased trucks, including the AZ-COM Maruwa Support Network and Momotaro Quick Ace (MQA), which supports independent contractors in conducting home deliveries for Amazon Japan exclusively. The company resolves issues for its AZ-COM Maruwa Support Network partners by offering services including joint purchasing of trucks, fuel, and consumables to reduce costs, and hiring and personnel development support. When an individual joins MQA, Maruwa Unyu Kikan provides him or her with the necessary equipment to make deliveries, including a uniform and a truck on a lease basis. It also supports these individuals with a revenue guarantee during the training period and provides administrative support when they officially register a business (including tax return support). When negotiating the price of services in a 3PL contract, it is the company’s policy not to lower the delivery price per truck below a certain amount so as to not compromise on quality. The company has built a win-win relationship with a large network of subcontractors that allows it to make deliveries nationwide.
Weaknesses
The time it takes to pass cost increases on to customers
When the company undertakes 3PL for a customer, the two parties enter into a logistics outsourcing contract for a period of around five years. Payments are based on a set percentage of the cost of goods sourced by the customer (or the cost of goods excluding logistics costs) that pass through the company’s logistics centers. This rate is set on a case-by-case basis, and the contract is reviewed every few years. This means that when, for example, labor or truck leasing costs rise, the terms of the contract make it difficult for the company to immediately negotiate price revisions to pass on these higher costs. While the company’s contracts with customers do include minimum revenue guarantees and contract review clauses, its profits will suffer if it is unable to successfully negotiate with customers to pass on cost increases. At present, there is a chronic shortage of truck drivers, and labor and truck leasing costs are on the rise. (See “Market and value chain: Market overview” for details)
Difficulty in raising profit margins as the need to tailor services to individual customers and engage in high-frequency, small-lot logistics makes it difficult to achieve economies of scale
The company has a dedicated logistics center for each customer. In addition, food and household products have a high turnover rate, so deliveries must be frequent and in small lots. This structure makes it difficult for the company to take advantage of economies of scale as it ramps up sales. In addition, the company’s logistics business mainly handles merchandise for supermarkets, drugstores, and e-commerce retailers. While these products provide stable earnings, they tend to be low-priced, which keeps freight prices relatively low.
Difficulty in automating warehouse operations due to their complexity, especially at smaller logistics centers
The company’s logistics operations involve packing individual items into crates at logistics centers and making daily deliveries to retailers’ stores. This ensures products are delivered to consumers in the required quantities and at the required time. The task of sorting and delivering tens of thousands of products every day is extremely complicated. According to the company, this complexity means that there are many cases where using human labor is more productive than using machinery. While it is easy to automate large logistics centers and see the resulting gains, it is much more difficult to automate smaller ones, and the benefits are much less visible.
Historical performance and financial statements
Income statement